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Aditya Goela, CFA

Aditya Goela, CFA

Co-Founder and Trainer at Goela School of Finance LLP | Chartered Financial Analyst® | Proprietary Trader | JoshTalk Speaker
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Fundamental Analysis: An introduction to fundamental analysis in the stock market

Aditya Goela, CFA

Aditya Goela, CFA

Co-Founder and Trainer at Goela School of Finance LLP | Chartered Financial Analyst® | Proprietary Trader | JoshTalk Speaker
Facebook
Email
Twitter
LinkedIn

Why do new investors burn their fingers in the stock market? Are they not smart enough? Do they lack ample resources, leading them to succumb to losses?

The answer is pretty simple- an absence of sound fundamental research with roots in a gambling mindset. Yes, you read it right! In most of these loss-making investments, lack of enough research by people was the most common reason. These people made investments either on the news or through recommendations from close ones. Some panicked at day-to-day price fluctuations and booked their losses in utter fear. Their emotions turned long-term investing into gambling. Thus, only a handful of retail investors and those who attended  Stock market classes, make a fortune out of stock markets, and the same will continue.

The technique to do proper research -Fundamental Analysis

The differentiating factor between highly successful investors and the rest is the amount of research done. Only a few carry out fundamental analysis studies before long-term investing. Fundamental Analysis is the study to figure out a stock’s health through its financial sheets and moats. It helps in checking the company’s viability for the long term.

Step 1: Fundamental Analysis of a company involves the study of its financial ratios (RoE, RoCE, Debt by Equity, and Interest Coverage Ratio etc.), and Valuation Ratios – (PE, and PB Ratios etc.).

Step 2: An assessment of annual reports, top-level management, and strategic initiatives is done.

Step 3: Microeconomic and macroeconomic indicators check with strategies from  Stock market classes at the end ensure no sectoral consolidation.

Let’s witness some stories:

A thorough reading of the Financial Statements like – Profit and Loss Statement, Balance Sheet, Cash flow Statements is done. As a next step, people have to verify the profitability of the business model, its competitive strength over peers, and loyalty towards the brand. At last, a check on the company’s products, the revenue model for future sustainability, is done. These things comprise what we call fundamental analysis.

Great investors like Mr Warren Buffett, Rakesh Jhunjhunwala, Ramdeo Aggarwal, Ray Dalio, Peter Lynch, etc. are fundamental value investors. They study the business well and stick during every up and down, till its fundamentals change. The study profiteers an investor in such a manner so he doesn’t get affected by the market’s daily volatility. He will focus more on the business – its growth, earnings, profits, revenues, margins and not the stock’s price. Through this, they can avoid rash emotional decisions. Stock market classes teach the same principle so their students can develop the right trading and investing mindset.

You may find the regular FA study to be tedious, but trust us, this is how it is supposed to be. Mr Buffet owns 400 Million shares of Coca-Cola. Before investing in Coca-Cola back in 1987, he read all the annual reports and statements of the company since its inception. He has made over 1,550% return only from his Coca Cola investments. With capital appreciation through bonuses, splits and dividends, he has earned himself a fortune. As the company grew and consistently increased its dividends, its returns also grew. Like Mr Buffett and Coca Cola, there are many stories where people who believed in the fundamentals of the company made a fortune eventually becoming big investors. Mr Rakesh Jhunjhunwala’s love for Titan is also a classic tale on the list of such stories.

How is a good fundamental analysis done?

Before choosing a company to invest in, it is better to look into its sector performance first. The next step involves an assessment of the promoter’s holding of the company for any signs of manipulation. When investing in a business, you should completely know the company’s vision. Questions like- How’s the management of this company? Are there any litigations? going on should arise in your mind. This will encourage you to dig deeper into the annual reports and check the assets and liabilities of the company. Then you check all the important financial ratios like PE, Debt to Equity, RoE, and RoCE.

One should do a careful study of the PNL statement and balance sheets of the company (lesson you learnt from Mr Buffet’s story). There is a high probability of finding existing defaults or issues in this section. The macro and micro indicators should be in favour. After this rigorous process, then only one should put their faith in the company’s growth and invest their hard-earned money. This is how  Stock market classes teach fundamental analysis, in-depth.

The magic of fundamental analysis lies in compounding.

Investments are never about getting rich quick, rather demands years and of belief and patience. A powerful company makes its shareholders the maximum money. Infosys, TCS, HUL, Nestle, etc. are all examples of excellent companies where long-term investors have made their fortunes. Unlike manipulated and penny stocks, they don’t lure the investor to make money quick and get trapped. We believe the sound ones to be strong enough to last forever and dominate their peers as the market leaders in their segment.

A wise investor will buy the undervalued stock as per his investment approach and sell it at overvalued levels or when his goal gets completed.

It’s okay if you believe this is all a theory. So let’s take a practical example!

In the 2008 crash, the market corrected by 50% and during that Tata Consultancy Services (TCS) came down by 63%. Was there anything wrong with TCS on fundamental grounds? Bad financial sheet or growth prospects? Poor management? None of them! This was the time when most of the investment strategies lit up with a very strong buy signal. Wise investors who had put their money in TCS are now with 2,766% returns, except bonuses, dividends and splits. This is a classic practical case of investing in excellent companies.

Fundamental Analysis is an art, and it requires a lot of practice. None of the big investors became a master overnight. A wise investor will always strive and continue to learn more. He will invest his time in studying and one may commit mistakes which is alright. But he’ll also rectify those mistakes and keep them as life lessons. Ultimately, he’ll become a successful investor with time, and this is our ideology at GSF providing  Stock market classes.

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1 thought on “Fundamental Analysis: An introduction to fundamental analysis in the stock market”

  1. Thank you for this amazing introduction to fundamental analysis in the stock market. You will get to learn about the techniques for researching properly in a step by step manner. The inclusion of real world examples and anecdotes make this blog a very interesting read.

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